WHAT IS A TRADING PLAN?

So what is a trading plan? In its simplest form a trading plan is a basic guideline
a trader uses giving him a reason for any trade he makes. It doesn’t
have to be elaborate or complex, though the more detailed it is, the better.
A trading plan encompasses all your trading thoughts and is a combination
of a few things. First, it’s a combination of a trading system or trading
methodology that generates both entry and exit signals. This doesn’t
have to be a mechanical system that automatically generates signals, but it
can be a simple trading strategy you follow with discretion. Regardless of
which it is, the strategy points you in the right direction. Without a strategy a trader would have no method of knowing when to buy and sell, in which
case he’d be trading randomly.

The second main part of the trading plan consists of money management
parameters. This is where amongst other things a trader figures out
how much he is willing to risk in general, at any given time, and per trade.
An example would be to risk no more than 4 percent of total capital on
any given trade or to not have more than $10,000 at risk at any given time.
Money management should not be taken lightly; in my opinion it’s more
important than trade selection. No matter how good you are, you will be
wrong often and it only takes one uncontrolled trade to wipe you out. It’s
money management alone that will make the difference between blowing
out and being around for the next trade. Make sure you spend the time to
have a solid money management approach as it may save you one day.
A trading plan doesn’t have to be written on paper, but it does help
immensely to actually write one out and then periodically review it. If you
don’t have one written out, start thinking about doing it. Read through this
chapter once to get the gist of what I’m talking about and then reread it to
get you started on making your trading plan. Even a simple plan is better
than no plan. If at the very least you know how much to risk per trade and
what market scenarios to trade, you will improve your trading.